MARKET WATCH: Gasoline stock growth nips energy prices

Energy prices pulled back July 11 with reports of a build in US gasoline inventories and increased US refinery capacity, but the rollback was limited by an unexpected decline in US crude stocks.

Jul 12th, 2007

Sam Fletcher
Senior Writer

HOUSTON, July 12 -- Energy prices pulled back July 11 with reports of a build in US gasoline inventories and increased US refinery capacity, but the rollback was limited by an unexpected decline in US crude stocks.

The Energy Information Administration said US gasoline inventories rose by 1.2 million bbl to 205.6 million bbl during the week ended July 6 vs. the consensus expectation of an 800,000 bbl build. Distillate inventories rose by 800,000 bbl—100,000 bbl less than expected—to 122.4 million bbl. Crude inventories fell by 1.4 million bbl to 352.6 million bbl (OGJ Online, July 11, 2007). That was the first decline in crude stocks in 6 weeks and was well above the expected drawdown of 100,000 bbl.

Despite the high-price environment, gasoline consumption growth remains robust (up 1.4% above year-ago levels) and supply constraints are still an issue. "Total US gasoline inventories are currently 7 million bbl (3%) below comparable year-ago levels, and with demand expected to continue rising through the summer months, we expect the refining margin environment to remain favorable," said Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., Arlington, Va.

Paul Horsnell at Barclays Capital Inc., London, said: "The level of gasoline demand continues to be a key feature of the US weekly data. The latest reading is the eighth straight week above 9.4 million b/d, the fourth straight week above 9.5 million b/d, and, at 9.633 million b/d, is only just short of the highest single weekly reading ever. (For the record, the highest single weekly reading was 9.721 million b/d way back in July 2005, which did look a little aberrant given that it was surrounded by a cluster of weeks of around 9.3 million b/d). While gasoline output slipped back in the latest data, imports have remained high, and hence the system has managed to continue the inventory build and close the gap on the 5-year average."

Horsnell added, "Over the past 4 weeks, Midwest crude inventories have fallen by 6.1 million bbl, while Gulf Coast crude inventories have risen by 15.2 million bbl."

Analysts in the Houston office of Raymond James & Associates Inc. said, "With oil prices steadily above $70/bbl, the roller-coaster ride from the broader markets over the past 2 days has directed the pace of the energy [sector]. Oil prices have withstood the trading pressures from profit-takers, aided by a larger-than-anticipated draw in last week's crude inventories, and are again trading higher this morning [July 12]. The bullish draw in crude inventories stemmed from a slight up tick in the refinery utilization rate—crossing over the 90% mark for the first time in 6 weeks—combined with a decline in crude imports. Gasoline inventories, however, have shown builds in 9 of the last 10 weeks, despite demand continuing to hold at near-record levels."

Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, said, "Speculative funds and technical traders have continuously tried for the last 4 [trading] days to break the $73/bbl resistance [level for benchmark US crude on the New York market] and have not given up despite the overall correction in the oil complex."

Jakob said, "An overall directional conclusion on the weekly statistics is hard to make as there were bits and pieces for bears and bulls. The strongest market reaction came from gasoline due to continued high imports, [East Coast] gasoline stocks back to the levels of last year, and the announced restart of the BP PLC Whiting, Ind., refinery units." BP earlier was forced to shut down for repair a 250,000 b/d oil processing unit at its 410,000 b/d refinery in Whiting.

Still, Jakob said, "High prices are one of the supply and demand solvers and we are starting to enter that zone." He noted, "No Atlantic tropical development is expected in the next 48 hours, but a watch must be kept on Japan where typhoon Man-Yi will hit over the weekend, and its expected path is not far from refining assets."

Meanwhile, Mexico has beefed up security with police and army guards at oil instillations after the left-wing Popular Revolutionary Army claimed credit for attacks on four pipelines in the last 2 weeks. The attacks have disrupted oil transportation in Mexico but did not affect oil exports, officials said (OGJ Online, July 11, 2007). The rebels vowed to carry out further attacks on Mexico's 14,000 km of pipelines.

Energy prices
The August and September contracts for benchmark US light, sweet crudes both dropped July 11 by 25¢, to close at $72.56/bbl and $72.94/bbl, respectively, on the New York Mercantile Exchange. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 25¢ to $72.57/bbl. Heating oil for August delivery fell 2.3¢ to $2.10/gal on NYMEX. The August contract for reformulated blend stock for oxygenate blending (RBOB) tumbled down 6.31¢ to $2.31/gal.

The August natural gas contract dropped 9.9¢ to $6.60/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated by 15¢ to the same closing price of $6.60/MMbtu. On July 12, EIA reported the injection of 106 bcf of natural gas into US underground storage in the week ended July 6. That was well above the Wall Street consensus and up from injections of 78 bcf the prior week and 89 bcf in the same period a year ago. US gas storage is now 2.6 tcf, down 64 bcf from year-ago levels but 374 bcf above the 5-year average.

"This triple-digit injection would signal that gas supply and demand, after adjusting for the weather disparity, is roughly 2 bcfd looser than year-ago demand levels," said Raymond James analysts. The latest injection figure was influenced by "the continued influx of liquefied natural gas imports, partially offset by declining Canadian imports and strengthening liquid stripping volumes," they said.

In London, the August IPE contract for North Sea Brent crude dropped 96¢ to $75.44/bbl. The July gas oil contract lost $3 to $650.25/tonne.

The average price for Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes gained 31¢ to $71.90/bbl on July 11.

Contact Sam Fletcher at samf@ogjonline.com.

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